Invest in Education
By Scott Niederjohn
Education as Human Capital
Investment takes many forms. One form is the development
of human capital—the knowledge, skills, health, and values that
individuals possess. People develop their human capital through
formal and informal education. To obtain education, people give
up something in the short run (time, effort, or money, for example)
in order to gain larger returns (such as a good job) in the future.
This sort of exchange—giving up something now in order to
realize gains later—is true of all investment behavior, whether it
involves putting money into a mutual fund or putting resources
into education.
There are many ways for you to invest in your own human
capital. These ways certainly include formal education (like earning
a bachelor’s or master’s degree from a college or university). Other
ways of increasing human capital include work experience, on-thejob training, specialized training courses, and certifications in
specific areas. By undertaking any of these activities, you can
increase your human capital and your productivity. Increases in
human capital are generally associated with higher incomes. The
possibility of earning a higher income acts as an incentive that
causes many people to pursue higher education.
Education and Earnings
The relationship between educational attainment, earnings,
and the unemployment rate is strong, as demonstrated by Exhibit 1.
Those with a bachelor’s degree can expect to earn almost $24,000
per year more than those with a high school diploma. This
translates into more than a million dollars over the course of an
average person’s working life. In addition, college graduates
experience lower unemployment. The unemployment advantage is
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almost four percentage points relative to high school graduates and
seven points relative to those who do not complete high school.
Exhibit 1: Earnings and Unemployment Rates by Educational
Attainment
Source: Current Population Survey, U.S. Bureau of Labor Statistics,
U.S.
Department
of
Labor,
available
online:
http://www.bls.gov/emp/ep_chart_001.htm. Data are for persons
age 25 and over. Earnings are for full-time wage and salary workers.
Determining “the right” next steps in your future education
As the prior section pointed out, there is a clear link between
education and earnings. Those that achieve higher levels of
educational attainment, on average, earn more income over their
careers and experience fewer episodes of unemployment. However,
let’s take a step back as you consider whether college is the right
choice.
Throughout most students’ years of schooling, they hear
about the benefits of education—and particularly college
education—from their teachers, parents, guidance counselors,
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family, friends, and other adults who care about them. These adults
understand this relationship between earnings and education, and
therefore are trying to provide useful advice to students. However,
while it is true that a four-year college degree is valuable for many
students, it isn’t necessarily the best choice for every student.
The decision to pursue higher education is an important one.
The direct costs of tuition, books, and living expenses in college
can be high; however, the time (or opportunity cost) associated
with full-time study after high school also represents a significant
and real cost. These costs raise the stakes of this decision and add
to the importance of making a good choice about your education.
As the next section explains, there are many options for
further education after high school. Two year, four year, and career
colleges are all examples. Nearly all high school students
(academically excellent, average, or poor) can likely find a four-year
college willing to accept them. However, keep in mind that if you
have generally been an academically poor-performing high school
student and did not enjoy your classes, you are likely to be a poor
college student and not enjoy those classes either. The difference,
of course, is that the college courses come at a high cost in both
tuition and time. A worst case scenario is that a student spends a
couple of years’ worth of tuition and time on college and then
drops out without a diploma. Your earnings will not be increased
much by this decision and you will have foregone valuable time in
the process. According to the Department of Education, the
average four-year graduation rate at American colleges and
universities is under forty percent and it only rises to about fifty
eight percent after six years.
It is important to be realistic with yourself. If college is not for
you and you know it, it can nonetheless be hard to resist the
pressure from friends and parents to attend. Keep in mind that
there are other options. It might make sense to enter a trade or
apprenticeship program, join the military, begin a career, or think
about starting a small business. One final point to consider: Life is
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not a ranking in which people with the most education are
somehow the “best.” If you bring an aptitude for making cars run
like new, then being a great mechanic is a major contribution to
your fellow men and women—and the marketplace will reward you
with a good salary. As Common Sense Economics (Part 4: Element 1)
says: “Discover your comparative advantage.”
Types of Higher Educational Institutions
There are a number of different kinds of colleges and
universities that operate in the United States. The differences
across categories are important:
Public vs. Private Schools: Public schools are operated or funded
by state and local governments. Private schools are not affiliated
with a government organization. They may be nonprofit colleges,
such as those run by private foundations or religious
denominations. Or, they may be for-profit businesses, such as
many career, online, or technical schools.
Since private schools receive less (or no) money from state
and local governments, they usually charge the same tuition
whether you live in or outside of the state. This cost is often higher
than the cost of attending a public school in your state.
Because costs can vary significantly from school to school,
you should make sure to research the schools in which you are
interested. Any school that participates in the federal student aid
programs is required to provide information on the cost of
attendance on its website.
Four-year Colleges and Universities: Students who attend a fouryear college or university typically earn a bachelor’s degree once
they have successfully completed a program of study, which usually
takes about four years.
A college usually offers a four-year bachelor’s degree in the
arts (such as English, history, drama) or sciences (such as biology,
computer science, and engineering). Some colleges also offer
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advanced degrees, such as a master’s or other graduate degree, after
you have earned your bachelor’s degree.
Universities offer bachelor’s, master’s, and doctorate degrees,
and sometimes have professional schools such as a law school or
medical school. Universities tend to be larger than colleges, may
have larger class sizes, and often focus on scholarly or scientific
research.
Two-year Colleges (Community and Junior Colleges): Community
colleges and junior colleges award associate degrees to students
who successfully complete a two-year course of study. Some twoyear colleges grant diplomas or certificates of completion to
students who are ready to practice in their career fields, such as
nursing. Community and junior colleges are similar, except that a
junior college is often a private school.
Because costs are often lower and admission is more open at
two-year colleges, many students begin their college careers here. If
you plan to start at a community or junior college and later transfer
to a four-year college, you should make sure your community
college courses will transfer to those colleges you are interested in
and that your courses will count toward your bachelor’s degree.
Many community colleges have “articulation agreements” with
four-year colleges under which the course work taken at the
community college transfers into the four-year degree program. Be
sure to ask about the types of articulation agreements the
community college has, with whom, and for what programs of
study.
Career schools: Career schools, also known as technical,
vocational, or trade schools may be public or private, although
many are for-profit businesses; they typically offer programs that
are two years or less, and provide students with formal classes and
hands-on experience related to their future career interests, from
welding to cosmetology to medical imaging.
Technical schools teach the science behind the occupation,
while vocational schools focus on hands-on application of skills
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needed to do the job. You may earn a diploma or a certificate,
prepare for a licensing exam, or study to begin work as an
apprentice or journeyman in a skilled trade at one of these
institutions.
Paying for Education: The Financial Aid Process
Higher education in the United States is expensive and costs
in this sector have risen much faster than the rate of inflation in
recent years. In addition, the actual price students pay for colleges
or universities varies and most students do not pay the “sticker
price” that is advertised in university brochures. Instead they pay
the “net price,” defined as cost of attendance minus grant and
scholarship aid. All schools that receive federal student aid are
required to include a net price calculator on their website. This
calculator estimates the net price a student will pay, based on
school data and on what similar students paid in a previous year.
The first step in the financial aid process involves filling out
the FAFSA, a form that will be required from each school you are
interested in attending. Using FAFSA information, the government
determines your level of “need,” defined as the total cost of
attendance not covered by the family’s expected contribution or
outside grants and scholarships. A Student Aid Report (SAR) tells
you how much aid you are eligible to receive and from where the
aid will come. The FAFSA can be completed in paper form and
then mailed in, or completed online at https://fafsa.ed.gov/.
Whether you are eligible for certain financial aid awards will
be determined from your FAFSA by your intended college’s
financial aid administrator. That financial aid administrator will be
the best source of information for you if you have questions
specific to your aid package or about a campus-based award
program.
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Invest in Education
Grants and Loans
Students can help finance their college tuition costs through a
number of ways. Grants and scholarships are an important source
of money and need not be repaid. Most colleges and universities
award both need- and merit-based scholarships. Students can also
consider loans for college or work-study opportunities. A list of the
most popular federal grant and loan programs is presented below.
• Federal Pell Grants: Federal Pell Grants are the most popular
federal grant program. Your eligibility is determined based
on the results of your FAFSA, and you must prove a high
level of financial need to be considered for the award.
While the grants are typically given to undergraduate
students, those pursuing certain teaching programs at the
post-undergraduate level may also be eligible.
• Campus-Based Aid Programs: Campus-based aid programs are
administered directly by the financial aid office of your
intended college. Federal programs such as the Federal
Supplemental Educational Opportunity Grant (FSEOG),
Federal Perkins Loan, and Federal Work-Study programs
are considered campus-based aid programs because those
awards are disbursed by college financial aid administrators
at participating schools. Your eligibility for this funding
will be determined by the results of your FAFSA and not
all schools offer these programs.
• Federal Stafford Loans: Federal Stafford Loans are the most
popular student loans guaranteed by the federal
government because of the low interest rates they offer
and their flexible repayment options. The loan may be
subsidized or unsubsidized. Subsidized loans are awarded
based on financial need, and the government pays the
interest while the student is in school, in deferment, and
during the grace period before repayment begins.
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Unsubsidized loans are not awarded based on income, and
the borrower is responsible for any interest accrued while
the student is in school, in deferment, and during the grace
period before repayment begins.
Taking out a student loan is a serious and potentially high-cost
decision. There is an important difference between student loans
and other loans (such as for a car or a house): filing for bankruptcy
does not remove your obligation to repay a student loan.
Researching Colleges, Universities, and Degree Programs
Due to the high cost of higher education, it makes sense to do
a significant amount of research before choosing a school. Net
price is important, but prospective students should also look at
graduation rates (to assess their own chances of finishing a degree)
and accreditation status (to judge how independent agencies rate a
school’s programs). Many other characteristics such as enrollment,
financial aid, admissions, retention and graduation rates, majors,
and athletic programs can be found on this website provided by the
National
Center
for
Education
Statistics:
http://nces.ed.gov/collegenavigator/.
Further, students need to carefully consider their choice of
major. This is particularly true when student loans are involved.
Borrowing heavily to acquire a degree in a high-paying occupation
like engineering, medicine, or law may make economic sense;
however, such debt is less likely to be prudent should the student
choose to pursue less lucrative areas such as the liberal arts.
Potential salaries in different fields of study are also important
to research. As an example, a recent survey by the National
Association of Colleges and Employers found that for 2013 college
graduates, eight of the top ten best paying majors were engineering
related. The same survey reports the following salary data (Exhibit
2) by broad area of study.
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Exhibit 2: Salary Data by Area of Study
Broad Area of Study
2013 Average Starting Salary
Engineering
$62,100
Computer Science
$58,500
Business
$55,600
Communications
$43,800
Math and Sciences
$42,700
Education
$40,300
Humanities and Social Services
$37,800
Source: National Association of Colleges and Employers, NACE
Salary Survey. http://www.naceweb.org/salary-survey-data
Scott Niederjohn is the Charlotte and Walter Kohler Professor of Economics at
Lakeland College in Wisconsin, where he also directs the Lakeland’s Center
for Economic Education. He has published more than fifty journal articles,
monographs, reports, and curriculum materials. During the fall of 2013, he
was awarded a Fulbright scholarship to teach at the University of Luxembourg.
He has a doctoral degree in economics from the University of Wisconsin –
Milwaukee.
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